Earnings Call Transcript - ZEPP Q1 2025

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for Zepp Health Corporation's First Quarter 2025 Earnings Conference Call. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Grace Zhang, Director of Investor Relations for the company. Please go ahead, Grace.

Grace Yujia Zhang, Director of Investor Relations

Hello, everyone, and welcome to Zepp Health Corporation's First Quarter 2025 Earnings Conference Call. The company's financial and operating results were issued in a press release via the newswire services earlier today and are posted online. You can also view the earnings press release and slides referred to on this call by visiting the IR section of the company's website at ir.zepp.com. Participating in today's call are Mr. Wang Huang Wang, our Chairman of the Board of Directors and the Chief Executive Officer; and Mr. Leon Cheng Deng, our Chief Financial Officer. The company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Mr. Mike Yeung, our Chief Operating Officer, will join us for the Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended December 31, 2024, and other filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note Zepp's earnings release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial information. Zepp's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I'll now turn the call over to our CEO, Mr. Wang Huang Wang. Please go ahead.

Wang Huang Wang, CEO

Hello, everyone. Welcome, and thank you for joining our first quarter 2025 earnings call. We are delighted to announce that this quarter, we see a 10% year-over-year growth of Amazfit revenue, the first time after two years of our transformation period. Before delving into this quarter's results, I would like to emphasize the challenging macro terrain within the consumer electronics sector. Trade frictions and fluctuating tariff policies have not only introduced uncertainty but also prompted us to undertake strategic enhancements to our operations. We proactively diversified our supply chain several years ago, foreseeing geopolitical complexities. Additionally, the recent U.S. tariff exemptions on specific product categories have alleviated some of the immediate pressure. Our dual sourcing model from China and Vietnam remains pivotal in ensuring operational agility; we have expanded our supply chain footprint in Vietnam and are actively exploring opportunities within the NAFTA region. This initiative aims to mitigate risk and optimize cost management. Our pricing strategy is tailored to each market and product line. In some instances, we have the flexibility to adjust prices, while in more competitive segments, price increases are challenging. Thus, we approach pricing on a case-by-case basis. Additionally, by offering a broader portfolio of products ranging from high-end to budget-friendly options, we are better equipped to offset potential tariff impacts. In summary, the U.S. represents a significant growth market for our business, accounting for about 15% of our revenue. Currently, tariffs have a minimal impact on our operations, but we remain vigilant, closely monitoring the macroeconomic environment and situation. Turning to our performance for the first quarter of 2025, despite the first quarter traditionally being a low season for consumer electronics, our overall sales aligned with our guidance. Notably, Amazfit products' sales increased by more than 10% compared to the same quarter last year, underscoring the success of our strategic shift to a more self-reliant, brand-centered approach and sustainable growth. However, due to the seasonal nature of the first quarter, fixed operating expenses were not fully absorbed by the increased sales, putting some pressure on our operating profit. However, we expect this to improve in the coming quarter. Now let's highlight some of our product achievements which continue to anchor our brand momentum. During the first quarter, we successfully launched the Amazfit Active 2 at CES 2025, which received positive reviews from major media outlets in both Europe and the United States. The Amazfit Active 2 strategically combines cutting-edge technology with stylish design, catering to the growing demand in the lifestyle smartwatch market. It features 24/7 health and fitness monitoring utilizing the latest advanced generation biosensor for enhanced precision in health tracking, improved algorithm, and 160 sports modes, including support for new sports like skiing. With AI-driven coaching and multi-satellite navigation, it offers seamless smart interactions targeting the overall user experience. Furthermore, we broadened our market reach with the launch of the Amazfit Bip 6 in March. The Bip 6 integrates advanced health tracking biosensing technology, AI coaching, and multi-satellite navigation for offline app functionality, offering consumers exceptional value at accessible price points. This product further strengthens our presence in the entry-level segment, aligning with our strategy to cater to a wide range of consumer needs and increase market penetration. Over the past four months, the successful launches of these smartwatches have secured top positions in the top-selling Amazon smartwatches. They have consistently secured spots within the top 50 and frequently rank among the top 10 in Amazon's smartwatch category in the major markets. They have also earned rave reviews within the Reddit community. The initial sales momentum of Active 2 and Bip 6 are much stronger than the previous versions. They have gained wide recognition from mainstream offline channels, helping the Amazfit brand continue to gain market share in the highly competitive smartwatch markets such as Spain and Italy. To name a few, in Italy, according to GFK, our market share of non-sim smartwatch unit sales stood at 23.3% in March 2025, ranked as #2 in the core wearable smartwatch market right after the 42% share of Apple. In Italy and Spain, five of our products are among the top 25 bestsellers in March '25. Just this past weekend, our global brand gained significant international visibility when Amazfit athlete, Jasmine Paolini, won the Rome Open, becoming the first Italian woman in 40 years to claim the title. Her breakthrough moment generated strong global media attention and spotlighted our Amazfit Active 2 watch, which she wore during the trophy ceremony and media interviews, alongside branded apparel prominently featuring the Amazfit logo throughout the tournament. We will leverage this momentum to further accelerate growth in our already strong Italian market and expand our influence across the broader sports category. As we continue to grow our global footprint, moments like these help build long-term brand equity and emotional connection with our expanding user base. The robustness of these budget-friendly products significantly impacts our brand influence and market share, not only paving the groundwork for the upcoming launches of our mid- to high-end products in the following quarter, but also bolstering the confidence of our channel partners. It has significantly broadened our user base and expanded the sales funnel, creating a more promising market landscape for our brand. To summarize, our new product sales in Q1 demonstrated exceptional momentum, reaching the highest level in our product history. The performance not only surpasses previous records but also outpaces our historical best-selling models, including the Bip 5 and the first-generation Active series. With production and delivery challenges on the verge of being fully resolved, we expect higher sales in the upcoming quarters from our new product launches. Turning to our technology innovations, Amazfit Active 2 and Amazfit Bip 6 are now powered by the latest Zepp OS 4.5, which incorporates OpenAI technology. Key features include advanced full voice control, enabling users to adjust settings and check progress hands-free. The messaging experience has also been improved, allowing users to reply using a full keyboard or speech-to-text input, with the system optimizing responses through suggestions or translations powered by large language models. Additionally, we have introduced the camera-powered food log feature in the Zepp app, which allows users to take photos of their meals directly in the app. The system automatically uploads nutrition data for seamless meal tracking. This feature is currently available in Europe, the U.S., and Japan. We remain committed to leveraging open-source technologies such as LLaMA. Recently, we enhanced the responsiveness of Zepp voice commands on our smartwatches, achieving a 17-fold improvement in speed. Additionally, by adopting a hybrid AI solution combining OpenAI and Google Gemini, we reduced the cost of food recognition in our app's food log to just 10% of the original. This has enabled us to expand the service across our wider region in Europe and double the daily usage allowance for users. This agile and strategic technological integration has accelerated the scalability of our health and fitness services, driving both innovation and cost efficiency. As part of our strategic effort to gain greater brand recognition and expand our influence, we have been actively involved in the Hyrox community. This year, we are participating in Hyrox events in Chicago, Taipei, and Shanghai, engaging with a global audience of fitness enthusiasts. Our partnership with Hyrox, where Amazfit serves as the official wearable and timekeeping partner, continues to strengthen our position in the competitive fitness sector. This collaboration allows us to support athletes with advanced wearable technology that enhances their training and performance. Looking ahead, we plan to expand our presence at Hyrox events, further integrating our products into the fitness community through a comprehensive series of brand campaigns and community-building initiatives centered around Hyrox. The activation rate of our T-Rex 3 device has sustained robust growth both year-over-year and month-over-month. Even eight months post-launch, the product has successfully captured the attention of sports enthusiasts across an expanding number of regions. This remarkable achievement not only underscores the market appeal of our offering, but also paves the way for a strong and promising launch of our upcoming lineup of flagship sports products. We continue to advance our sports and lifestyle strategy by building brand awareness through event sponsorships and partnerships with top athletes. We are thrilled to welcome five-time Olympic Medalist Gabby Thomas and Italian tennis star Jasmine Paolini as our global athlete partners. These partnerships enhance our brand visibility on the world stage while showcasing how Amazfit smart wearables empower top-tier athletes with data-driven insights to optimize their training, recovery, and overall performance through new product introductions, innovations in our software, and continuous investment in brand awareness and recognition. We have set clear strategic objectives to drive our next phase of growth. These include strengthening our presence in entry-level markets, deepening collaboration and investment with our offline channel partners, expanding brand exposure and community engagement, and ultimately guiding users towards upgrading our mid- and high-end product offerings from the Active series towards the Balance and T-Rex series. Looking ahead to the second quarter of 2025, we are optimistic about achieving our first year-over-year growth of overall sales since 2021, which will be a significant turning point for our company. The anticipated growth is driven by product innovation, strengthened partnerships, and an expanding global presence. At the same time, we remain vigilant of the macroeconomic challenges and uncertainties. Our strategy to navigate these complexities includes further optimizing our supply chain, strengthening broader brand positioning, and enhancing product differentiation. These efforts will ensure that Zepp Health remains resilient and competitive in the evolving smart wearable market. I believe 2025 will be a fruitful year for Zepp. I will now turn the call over to Leon to go over the highlights of our first quarter financial results.

Leon Cheng Deng, CFO

Thank you, Wang. Greetings, everyone. Thank you again for joining our first quarter 2025 earnings call. Let me start by highlighting some key metrics from our financial results for the first quarter of 2025. I would like to share some of our supply chain strategy first. We operate in a dynamic global environment influenced by macroeconomic factors and changing tariffs. However, we are well positioned due to past actions. Echoing what Wang just mentioned, we shifted most U.S.-bound productions from China to Vietnam in past years, limiting our exposure to China tariffs. Our remaining China tariff exposure is limited to a few accessories like packing boxes and chargers, which are a very small part of our business. These moves give us production flexibility and optionality as new tariff structures take shape. Currently, we are seizing the opportunity of the temporary Vietnam tariff halt by ramping up production, scenario planning with manufacturers for origin flexibility, collaborating with partners and retailers to showcase consumers, and accessing pricing and promotion strategies to keep products more appealing while optimizing gross profit. We believe these strategic arrangements will enhance our operational resilience. With a strong balance sheet, a nimble operational posture, and an experienced team executing with discipline, we are setting ourselves up for fruitful performance in 2025. Now let's turn to the financials. In Q1, our sales came in line with the guidance range we provided. Notably, we achieved 10.2% year-over-year growth in our Amazfit branded products, which reflects the strong market reception of our newly launched models, Active 2 and Bip 6. This marks the first year-over-year growth of our Amazfit branded products we have achieved since the start of our transformation journey. We consider it a significant milestone as we are confident this positive momentum will persist through the second quarter and expand well beyond, as we have more new products lined up for the remainder of the year. Turning to gross margin. It was influenced by various factors, including product mix, product launch timing, and product life cycle such as model upgrades. In Q1 2025, we achieved a gross margin of 37.3%, which is higher than both Q4 2024 and Q1 2024, largely driven by new product launches. During the quarter, gross margin was negatively impacted by the additional 20% U.S. tariff on China-made products, which reduced our gross margin by approximately 1 percentage point. Excluding the tariff impact, gross margin would have reached 38.4%. Looking ahead, we expect gross margin expansion to continue into the rest of 2025. Now let's turn our attention to costs. We remain steadfast in our commitment to cost management, continuing with the program that we began in Q3 2020 on reducing overall operating costs. Operating expenses for the first quarter totaled USD 31.5 million compared to USD 29.3 million in Q4 '24 and USD 27.8 million in Q1 2024. The USD 2.2 million quarter-on-quarter increase mainly reflects higher R&D expenses, as we continue to invest in new product development, along with increased selling and marketing expenses to support our Q1 launches. Compared to Q1 2024, operating expenses increased by USD 4 million year-over-year. This increase includes approximately USD 3 million in higher selling expenses, driven by USD 1.7 million spent on digital marketing campaigns and new product launch events, and USD 1.4 million invested in strengthening our sales channels. Additionally, we faced around USD 1 million in foreign exchange headwinds during the quarter. We will maintain our cost-conscious approach in the upcoming quarters to keep the overall operating cost at a level between USD 25 million to USD 27 million per quarter. Concurrently, we remain committed to investing in R&D and marketing activities to ensure our long-term competitiveness. R&D expenses in the first quarter of 2025 were USD 11.5 million, a decrease of 3.4% year-over-year. The decrease was a result of our refined research and development approaches. As Wang previously mentioned, we are committed to investing in new technologies and AI-like open-source technologies to secure our long-term technology leadership. Selling and marketing expenses in the first quarter of 2025 were USD 13.8 million and increased by 31% year-over-year. This increase was primarily driven by the USD 1.7 million spent on digital marketing campaigns and new product launch events and then USD 1.4 million invested in strengthening our sales channels. We also engaged with rising sports stars like Gabby Thomas and Jasmine Paolini to improve our brand awareness. At the same time, we consistently pushed for retail profitability and channel mix improvement. We are committed to investing efficiently in marketing and branding expenses to ensure our sustainable growth. G&A expenses were USD 6.2 million in the first quarter of 2025 compared with USD 5.4 million in the first quarter of 2024. The increase was largely attributed to foreign exchange headwinds. The adjusted operating loss for the first quarter of 2025 was USD 17.2 million compared to the adjusted operating loss of USD 13.1 million for the same period of 2024. The first quarter is typically the season with the lowest sales, which resulted in an inability to fully cover the operating costs. As of March 31, our cash balance stood at USD 104 million compared to USD 110 million in Q4 2024. Despite a net loss in the quarter, our cash balance only declined by roughly USD 6 million, thanks to our enhanced working capital management and improved cash conversion cycle, offsetting the cash burn. We have made solid progress in our capital structure. During the quarter, we successfully refinanced a significant portion of our short-term debt into long-term instruments with a more favorable interest rate and a two-year duration. This move significantly reduced our near-term liquidity pressure and improved our overall balance sheet flexibility. During Q1 2023, we initiated the retirement of our short and long-term debt portfolio. As of Q1 '25, the company has retired a total of USD 67.8 million of debt cumulatively with another USD 11.5 million repaid in Q1 2025. As the capital structure further optimizes, our operating cash flow strengthens. We're pleased to reconfirm our commitment to the share repurchase program for 2025. We believe our current valuation continues to represent an attractive opportunity and reflects our confidence in the company's long-term fundamentals. Turning to our outlook. For the second quarter, we expect revenue to be in the range of USD 50 million to USD 55 million, showing significant year-over-year revenue growth of 23% to 35%. Along with the efforts we have made over the past years to cut operating expenses, diversify our supply chain, and reduce costs, we anticipate a boost in profitability during the second quarter. Additionally, we remain focused on driving operational efficiencies and expanding our supply chain beyond China to reduce costs and mitigate external risks. At current tariff rates, we estimate the tariff impact in 2025 will be approximately USD 2 million to USD 3 million. However, this impact is expected to be fully offset by global operating efficiency gains. To provide some color on expectations for the balance of 2025, we have many exciting products lined up for the remainder of the year, which will continue to drive our revenue growth for the rest of the year, as evidenced by our strong sales performance guided for Q2 2025. We expect our full-year 2025 operating expenses to be at or below the level versus 2024. We expect to offset tariff cost headwinds with operating efficiency gains and continued supply chain diversification outside China. The initiatives we undertook in 2024 to reduce operating expenses and improve gross margins are bearing fruit. We are focused on launching a significant number of new products in 2025 and 2026 to restore growth and profitability to our business. Thank you all for your time today. I will now open the call for questions.

Operator, Operator

The first question today comes from Sid Rajeev from Fundamental Research Corp.

Siddharth Rajeev, Analyst

I was wondering if we could get more color on the impact of tariffs. As U.S. exports are produced in Vietnam, is it fair to say your products are currently subject to a 10% tariff? And also, given the 90-day pause, what happens if the tariff increases to 46% in July? How are you planning for that impact?

Leon Cheng Deng, CFO

Yes, very good question. As I just mentioned, we are expecting the full year tariff impact to be around USD 2 million to USD 3 million in total. However, this impact is to be fully offset by our global operating efficiency gains. There are two aspects to consider. First, even in an environment where the China-U.S. tariff is very high, our category as a smartwatch is exempt from such tariff impacts. So certain electronics products are exempt from the tariff impacts between China and the U.S. Secondly, we are using Vietnam as a backup for dual sourcing to provide goods for our U.S. business. So we supply the U.S. from Vietnam and the rest of the world from China. We are expecting, after the 90-day pause, the situation between the U.S. and Vietnam will normalize, likely to about 10%. Even if it doesn't come back, I believe that given the recent truce between China and the U.S., and our product category being exempt from tariff impacts, our tariff situation for the U.S. business for the remainder of the year would remain manageable. However, we also plan to use the upcoming 90 days to front-load some of the inventories into our U.S. warehouse to prepare for Q4 sales, locking down our tariff projections. Overall, I don't believe it will have a major impact for us. However, the uncertainty remains, and we are considering mid- to long-term strategies to establish a triple sourcing option in the NAFTA region.

Siddharth Rajeev, Analyst

Got it. So the USD 2 million to USD 3 million you estimate is based on a 10% tariff, not the 46%.

Leon Cheng Deng, CFO

That is correct. That estimate is based on a roughly 10% tariff.

Siddharth Rajeev, Analyst

Okay. Thank you. What are you seeing in the market these days? Are you and your competitors planning or raising prices, passing costs to consumers? What are your thoughts on that?

Leon Cheng Deng, CFO

We are not ruling out all possibilities, but I think we're not going to be the first mover. We will definitely monitor the situation with competitors such as Apple or Garmin. If they act on pricing, we might consider it. However, since the impact is relatively limited for us, I don't think we'll make significant adjustments to our pricing strategy. We will evaluate our pricing on a region-by-region and country-by-country basis, making adjustments where needed.

Siddharth Rajeev, Analyst

Okay. In terms of OpEx, your goal to get to USD 25 million to USD 27 million a quarter. When can you realistically achieve this? And what areas would you cut to get to that number?

Leon Cheng Deng, CFO

I think realistically, you will see a significant reduction in Q2 already. We’re confident that we are heading back to a normalized expense level. The high amount in Q1 was due to some major product launch events, which won't happen on a recurring basis. Additionally, we faced a USD 1 million foreign exchange headwind, which we are hedging. Therefore, I think you will see positive signs of cost reduction in Q2.

Siddharth Rajeev, Analyst

Just one final question, Leon, if I may. Last year, you had one product release. This year, how many new products or upgrades are you planning from now to the end of the year?

Leon Cheng Deng, CFO

I couldn't provide an exact number, but I can say that we aim to refresh all our major product lines in the different quarters ahead. For Q1, we already launched the Active and Balance models, and we are preparing for new product launches in China in May. There are many exciting products lined up, and I assure you that there will be more than two launches in the upcoming quarters.

Operator, Operator

The next question comes from Nicolette Jones from Brooks Investment.

Unknown Analyst, Analyst

Sid has actually asked most of them, but I just wanted to sort of get more detail into the full-year 2025 performance. If you could just give us some more insight into how you see the full year panning out?

Leon Cheng Deng, CFO

Yes. Normally, we don't guide for a full-year number, but this time, I can definitely say a few things about it. As Sid previously asked, we have many exciting new products lined up for the remainder of the year, which from a sales perspective will continue to drive our revenue growth. As you can see, our Q2 guidance shows sales growth between 23% to 35%, if not higher. From a revenue standpoint, the second half of the year traditionally is high season for consumer electronics, with events like Black Friday and Christmas. Therefore, we expect the revenue growth trend to increase for the remainder of the year. You will also note our gross margin expansion journey has been ongoing, and we will continue that journey. I expect gross margin to remain around the current level and increase as we move forward. Finally, concerning costs, Q1 is somewhat of an outlier. For the full year, we expect G&A, R&D, and marketing expenses to be in line or lower than 2024's full year costs. We anticipate offsetting tariff cost headwinds with operating efficiency gains, ensuring no negative impact on our gross margin. Overall, we are quite confident that 2025 will be, as Wang mentioned, a fruitful year for us if we execute our plan.

Operator, Operator

Since there are no further questions, now I'd like to turn the call back over to the company's IR Director, Grace Zhang, for closing remarks.

Grace Yujia Zhang, Director of Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact Zepp Health's Investor Relations department through the contact information provided on our IR website. Thank you.

Leon Cheng Deng, CFO

Thank you.

Operator, Operator

This concludes the conference call. You may now disconnect your lines. Thank you.